ETFs
Here’s Why You Should Bet on Small-Cap ETFs That Got Beaten Down
The small-cap segment rallied as expectations for a Fed rate cut in the near future rose following the latest inflation data. Investors shifted away from the booming technology sector to struggling small-cap stocks, expecting conditions for these companies to improve following the rate cut.
The Russell 2000 small-cap index, which has lagged considerably this year, jumped 3.4% to its highest level in more than three months on June 11. Investors should therefore take advantage of the decline in prices. For them, we’ve highlighted five good ETF picks that were in the red this year but are likely to rebound given current market sentiment and a favorable Zacks ETF Rank #3 (Hold). They are: ETF Pacer US Small Cap Cash Cows 100 CALF, Invesco S&P SmallCap 600 Pure Value ETF RZV, INvesco Russell 2000 Dynamic Multifactor ETF MOFS, Roundhill Acquires Deep Value ETF DEEP and SPDR S&P 600 Small Cap Value ETF SLYV.
At the heart of the last surge
U.S. inflation slowed in June for the third consecutive month. The consumer price index rose just 3% year-on-year last month, compared with 3.3% annual growth in May. On a monthly basis, the price fell 0.1% from May’s stagnation. This is the first monthly decline in inflation since 2020 and the smallest annual price increase since March 2021.
Other recent data, signaling a slowdown in the world’s largest economy, also supported rate cut bets. After the encouraging inflation data, markets priced in about an 89% chance that the Fed will begin cutting rates at its September meeting, up from 75% the day before, according to CME Group data. That boosted market confidence that the Fed would begin cutting interest rates in September, sending small-cap stocks higher (read: September Rate Cut Bets Make These ETFs Attractive).
This is especially true because these smaller companies have higher debt levels, and lower rates generally translate into lower borrowing costs. This helps smaller companies expand their operations more easily, leading to higher profitability. This, in turn, boosts economic growth. Because small-cap companies are more tied to the domestic market, they are well positioned to outperform when the economy improves.
Moreover, small-cap stocks are attractively valued at current levels relative to their large-cap cousins. According to Yardeni Research, small-cap stocks were trading at a forward price-to-earnings ratio of about 14 as of June 28, compared with about 21 for large-cap stocks, the widest gap since the tech bubble of the late 1990s.
In addition, small-cap stocks are considered safer and more attractive in times of political trouble or economic turmoil, as small stocks generate most of their revenues domestically. Escalating tensions in the Middle East, the ongoing war between Russia and Ukraine, and the approaching US presidential elections are adding to the appeal of small-cap stocks.
Moreover, the artificial intelligence (AI) craze promises to open up new growth opportunities. While large companies are leading the AI world, many small-cap stocks with huge potential in this space remain untapped. According to a new report by Grand View Research, the global AI market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030 (Read: 5 ETF Predictions for H2 2024).
The story continues
ETFs to consider
Pacer US Small Cap Cash Cows 100 ETF (CALF) – Down 11.2% YTD
Pacer US Small Cap Cash Cows 100 ETF is a strategy-focused ETF that seeks to provide capital appreciation over time by screening the S&P SmallCap 600 Index for the top 100 companies based on free cash flow yield. CALF tracks the Pacer US Small Cap Cash Cows Index and holds 102 stocks in its basket. Consumer Discretionary ranks first with 28.8% of assets, followed by Industrials (20.4%) and Energy (13.2%).
The fund has accumulated $8.6 billion in assets and trades an average of 2 million shares per day. It charges 59 bps in annual fees.
Invesco S&P SmallCap 600 Pure Value ETF (RZV) – Down 8.1% YTD
The Invesco S&P SmallCap 600 Pure Value ETF provides exposure to stocks of companies that exhibit strong value characteristics by tracking the S&P SmallCap 600 Pure Value Index. It holds 140 stocks in its basket, with key holdings in the financials, consumer discretionary and industrials sectors.
The Invesco S&P SmallCap 600 Pure Value ETF has $227.5 million in assets under management and trades an average of 11,000 shares per day. It charges 35bps in annual fees.
Invesco Russell 2000 Dynamic Multifactor ETF (OMFS) – Down 7.8% YTD
The Invesco Russell 2000 Dynamic Multifactor ETF tracks the Invesco Dynamic Multifactor Russell 2000 Index, which uses a rules-based approach that re-evaluates the small-cap stocks in the Russell 2000 Index based on economic cycles and market conditions, as reflected by expansion, slowdown, contraction or recovery. It holds a broad basket of 683 stocks with double-digit exposure to sectors such as financials, industrials and information technology.
The Invesco Russell 2000 Dynamic Multifactor ETF has accumulated $297.7 million in assets and charges 39 bps in annual fees. It trades an average of 55,000 shares per day.
Roundhill Acquirers Deep Value ETF (DEEP) – Down 6.9% YTD
The Roundhill Acquirers Deep Value ETF is designed to provide retail and institutional investors with exposure to significantly undervalued stocks, seeking to provide investment results that measure the performance of the Acquirers Deep Value Index. It holds 100 stocks in its basket, with key holdings in the consumer discretionary, industrials and financials sectors.
Roundhill Acquirers’ Deep Value ETF has accumulated $33.3 million in assets while trading at an average daily volume of 1,000 shares. It charges 80bps in annual fees.
SPDR S&P 600 Small Cap Value ETF (SLYV) – Down 5.1% YTD
The SPDR S&P 600 Small Cap Value ETF targets stocks that exhibit the strongest value characteristics based on book-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. It tracks the S&P SmallCap 600 Value Index and holds 462 stocks in its basket. SLYV is broadly spread across multiple sectors, with the financials, industrials, and consumer discretionary sectors each representing double-digit exposure.
The SPDR S&P 600 Small Cap Value ETF has $3.6 billion in assets under management, while trading on average at a lower volume of 159,000 shares per day. It charges 15 bps in annual fees.
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Invesco S&P SmallCap 600 Pure Value ETF (RZV): ETF Research Reports
SPDR S&P 600 Small Cap Value ETF (SLYV) : ETF Research Reports
ETF Pacer US Small Cap Cash Cows 100 (CALF): ETF Research Reports
Invesco Russell 2000 Dynamic Multifactor ETF (OMFS): ETF Research Reports
Roundhill Acquires Deep Value ETF (DEEP): ETF Research Reports